Looking to fund transit in the GTAH? Fix the wonky policies

December 1, 2013

The Province’s Transit Investment Advisory Panel will soon release a report with its recommendations on how to fund Let’s Move – the $50 billion transit investment program. The Panel’s focus is new revenue tools – including Metrolinx’s own short list: increased development charges, increased sales tax, a parking levy, and an increased fuel and gas tax.

In short, the Province needs to make sure that it doesn’t undermine its own investment in transit – by maintaining existing subsidies and tax incentives that disproportionately encourage driving.

If we want our $50 billion to actually deliver new transit riders on the scale it needs to, the broader framework of Provincial investment and tax breaks needs to be straightened out. We can’t expect to attract large numbers of commuters out of their cars if we

1) keep spending on roads at the current levels, perpetuating the current pattern of car-dependent growth, and

2) continue providing tax breaks to car ownership and driving.

Oh, and by the way, by fixing these wonky policies, we create a revenue source to fund transit: by redirecting a portion of planned overinvestment in roads to transit, or eliminating conflicting tax measures. One example of the latter is the current sales tax break on car insurance (estimated at $985 million of foregone revenue annually).

We could fund a good slice of the $2 billion a year the Province is looking for without new revenue tools or increased charges, by doing what we need to do anyway.

Here’s more detail from the submission:

To the Chair and Vice-Chair:

….

The central transportation challenge in our region is to attract large numbers of new riders to transit. This will mean enticing hundreds of thousands of commuters out of their cars and onto buses, trains and streetcars.

With this in mind, it is critical to avoid a situation in which the ability of the $50 billion Let’s Move transit investment to attract new riders is undermined by other conflicting provincial policies and actions – and a large scale shift to transit is not achieved.

Revenue tools to fund transit must be considered within the broader context of existing financial incentives, disincentives, and investment – in this case particularly in the context of provincial incentives, disincentives and investment.

Achieving the right balance of investment in roads relative to transit will be critical to the success of the planned transit investments. In trying to effect a shift to transit, getting this balance right is a strategic matter that deserves considerable attention.

Overspending on roads can undermine the ability of new transit investment to attract riders. If we continue to invest in roads and expand the road network at the current rate, perpetuating our car-dependent urban form, there will be little incentive for commuters to make the switch to transit.

Our current spending patterns seem to disproportionately favour roads. For example, in 2011, $546 million of funds raised through development charges in Ontario municipalities was spent on roads, compared to $85 million on transit[1] – more than 6 times as much on roads as transit. If the City of Toronto, where much transit investment is taking place, is taken out of the equation, the numbers are $536 million spent on roads versus $71 million on transit, that is, almost 8 times as much on roads as on transit.

It is true that the development charge system imposes constraints on the ability of municipalities to raise money for transit through development charges (an issue in itself), but relative spending on roads and transit is nonetheless an important indicator. Development charge spending is up to municipalities, but it is important to monitor the aggregate impacts of such spending relative to provincial transit objectives.

The numbers mentioned above only reflect development charge spending and do not include spending on roads and transit funded by the province, by the federal government, or paid for through municipal property taxes and user fees. I am afraid I do not have these figures for the GTAH. However, I have done a rough calculation of projected spending in the GTAH based on municipalities’ development charge background studies, that places total projected growth-related spending at a ballpark figure of $15 billion over ten years for roads. (This figure too represents only a part of spending on roads.[2])

Making a shift to transit will require making a shift in investment, so that the province does not undermine its own $50 billion in transit spending. Making this investment shift – a reallocation of some spending from roads to transit to achieve the right balance– coincidentally creates a significant source of funding for transit. This could potentially deliver some hundreds of millions of dollars to fund transit in the coming years. It is a funding source that does not require new revenue tools or increased charges.

That is the spending side – what about the pricing side? Rational people consider the prices of things when they make their decisions, including decisions about how to travel in cities. Provincial policies affect transportation pricing, creating incentives and disincentives that affect these travel decisions.

It will be very important to create a rational and coherent set of price signals around transit in order to attract significant numbers of new riders. This is a key piece of the issue and deserves considerable attention.

Provincial tax policy plays a key role. Provincial tax policies must support the objective of attracting significant numbers of new transit riders. Again, the incentives to car travel relative to transit travel will be critical. If the province wants to attract a large number of new transit riders, it should ensure that it is not providing unwarranted and conflicting subsidies and financial incentives to auto travel.

As one example, in 2000, the province eliminated the retail sales tax on auto insurance premiums. This tax expenditure is currently estimated to cost the province $985 million per year[3]. This is an illustration of a subsidy that provides a clear incentive to driving.

This, and other potential subsidies and incentives to auto travel need to be closely examined in the context of substantial provincial investment in transit. This is to ensure that the price signals created by tax policy support the objective of attracting new riders to transit, and the province’s transit policy objectives.

Moreover, to invest heavily in transit while subsidizing auto travel risks a potential waste of financial resources, with the effects of the investment and the conflicting tax breaks undermining each other.

Coincidentally, an elimination of this tax break would provide a significant source of funding to transit. This tax expenditure alone, with a current value of $985 million per year, is about half of what the province is looking for to fund transit. And this is just one example – there may well be other tax breaks that similarly conflict with a shift to transit.

To conclude, it’s my belief that a determination of the best tools for funding transit must include looking at the broader picture. That includes the wider context of the incentives and disincentives that provincial tax policy and investment create. It’s critical that these measures add up to a rational and coherent framework of investments, incentives and disincentives that support the province’s broader transit objectives, and its own investments in transit.

Fortuitously, undertaking this rationalisation, which is necessary in any event, can also provide significant revenue sources without new revenue tools.

[2] This figure represents the projected need for new infrastructure to serve new development, and includes infrastructure that could be funded by development charges, municipal property tax and user fees, or federal and provincial grants. This is still not a comprehensive figure: it does not include spending on roads that is not related to growth and therefore not identified in development charge background studies. Other spending on roads, such as provincial investment in highways, is also not included.